Case Managerial Accounting - Variable Costing Managerial accounting emphasizes short-term profit analysis, income statement important. Consequently, 'll examine discuss income statements case.
Managerial and Financial Accounting
Financial and managerial accounting basic difference comes on the uses. While, financial accounts are prepared for use by external parties, managerial accounts are prepared for use internally. The process of preparing the accounts in both financial and managerial accounting use similar source for data their emphasis differs. Managerial accounting has a measure to guide and direct the mangers orientation on future perspectives of a firm. Financial accounts primarily provide information on the firms past performance and transactions in summary. The managerial accounting aspect gives a detailed reflection of constantly monitored performances and a reflection for projected estimates (Rachchh, 2011).
Objectivity and validity of financial accounting information is an expectation of the users. Managerial accounting information need only to be relevant its verifiability is not paramount. Managerial accounting relies on estimate to plan and predict the future. This predictive function does not require verification and since flexibility is paramount for managerial accounting validity is ignored. To managers, precision is important in order to make decisions that can be relied upon. Managers concentrate more on non-monitory data such as customer satisfaction compared to financial accounting that gives more information in monetary terms (Siegel G., 2000).
Financial accounting with giving reports on the company as a whole looking at the company as one entity. Managerial account considers looking at segmented components of the whole organization. The mangers account show the contribution of sales to profits, the appropriation of the overheads and also shows a breakdown of the revenues and cost.
Regulations are given in the preparation of financial accounts for use by external stakeholders. There are generally accepted accounting principles set for the preparation of financial accounts. These principles make assurance to the external users that the account preparation does not reflect information otherwise untrue. From these principles, a common ground is laid to facilitate comparability. The preparation of financial accounts is mandatory for use by the external user such as tax authorities, shareholders and creditors. The managerial accounting is not necessary and a firm is free to undertake their own measures in the preparation of such account. Managerial accounts come in handy where the valuation of assets held by the company required being disposed. Example, financial accounting requires the firm to report the value of land held at the cost value rather than market value. To relocate a plant will require the manager to revalue the land property to the market value in order to dispose it (Kaplan, 2009).
Role of managerial accounting
Management accounting is purposed to support the organization decision making process to support its sustainability and competitive functions. The decision making process is supported by gathering information, analyzing it, communicating, controlling and planning a strategy. Management accounting is tasked with the role to ensure a flow of information on the organization's to support planning and control of work within the organization. Management accounting makes an audit of the resources available to an organization to highlight the potential within the organization (Blocher, Stout, Cokins, & Chen, 2008).
Changes in managerial accounting
Managerial accounting has changed from strict staff capacity functioning to incorporation of consultants in cross functional team managers in different departments. Managerial accounts are not independent accounting departments within a firm any more. Rather, they are an operating department working in coordination with other department managers, facilitating decision making and resolving operational problems. Managerial accounting has over time come to be a proponent component of the firm acting as an accurate measure to relay advice. Management accounting adds values to the organization (Harrison Jr., Horngren, & William, 2012).
Certified Management Accountant (CMA) designation
Certified management accountant works mainly with a corporation in providing advice on matters relating to finance affecting company management. CMA gives advice to a company on financial planning, budgeting, corporate spending, and tax compliance. A Certified management accountant works seldom to oversee the in-house financial affairs of a corporation. A person qualified as a certified management accountant has training in economics, performance measurement, financial analysis, financial planning, budgeting, corporate taxation and business accounting ethics (Gerhart, Hollenbeck, Noe, & Wright, 2007).
Unlike the CMA a certified public accountant is more concerned public domain of the corporation. A CPA handles task relating to the company auditing function, taxes and preparation of mandatory final year statements. A certified public accountant has the obligation to follow the legal financial requirements in preparation of the accounts set by the local government body. In terms of qualification, a CPA certification is broad in covering varied perspective of account preparation. The CMA covers specialized aspect of a corporation (Gerhart et al., 2007).
Absorption costing and contribution costing
Absorption costing is a measure used to compute the total cost of a product by apportioning the total overhead of a firm. The apportionment is meant to reflect the time and effort a final product has gone through. Absorption costing means the incorporation of a fair share of costs into a unit of output realized through the process of production. The assumption made is that the final product has a share in the total cost of the total cost incurred over the time production was undertaken (Rachchh, 2011).
The costs of the products are built up by the process of apportioning the overheads of the firm. The first measure is to divide the overheads of the firm among the different departments of the firm. A fair basis apportionment is used to allocate these costs. Example the floor space area of a department, or the man hours used is deployed to determine the proportionate share of the overheads. The departmental apportioned overhead cost is further apportioned to the cost of production further divided to specific products.
Contribution or variable costing is not accepted as an accounting system by U.S. regulations for accounting GAAP (Blocher et al., 2008). For this reason, variable costing is used by firms for their internal purposes only. It cannot be used to yield financial statement for external users. Contribution costing involves taking the total overhead costs to a firm is not treated as part of the cost on inventory produced. Rather, fixed manufacturing costs are treated as expenditure items in the current period in a firms operation. Costs in contribution costing method are either a variable cost of the fixed cost (Blocher et al., 2008).
Under the two costing methods net profits are bound to be different. The observation is made that while using the absorption costing, net profit will not exclude cost of capital item purchased in the accounting period. Contribution costing method will reflect lower profits in the initial years of profit computation since the capital goods purchased on that years are counted as expenses. The profits in the absorption costing method will be reflective of the corporations' use of the capital items over the years while in the corporation. Over the years net profit under contribution costing will be high and will not reflect the wear and tear on the assets since it has been treated as an expense in previous years (Harrison Jr. et al., 2012).
Business revenue, expenses, and the resulting profit or loss over a given period of time are detailed in the Income Statement. It is also called the Statement of Income and Expense, Statement of Earnings, or the Profit and Loss Statement. This report reflects the company's chosen fiscal year. For tax purposes, the owner may need to prepare a second Income Statement based on the calendar year, if the fiscal year is different (Blocher et al., 2008).
Breakeven analysis can be a very useful and relatively simple tool for management to use in making decisions. It can be used for dealing with unknown variables such as demand. By specifying the levels of known variables such as cost or profit, a required or minimum level can be found for the unknown variable. Any problem requiring income estimation can be set up so that the most difficult variable to estimate is isolated for solution. Breakeven analysis is not a panacea. It is only one of the many tools available to the business decision maker.
It serves as a substitute for estimating an unknown factor in making project decisions. In deciding whether to go ahead or to skip it, there are always variables to be considered: demand, costs, price, and miscellaneous factors. When most expenses can be determined, only two missing variables remain, profit (or cash flow) and demand.
Break-even analysis is the use of a simple mathematical formula to determine the sales level at which the business is neither incurring a loss nor making a profit. In other words, when the firm's total expenses equal its net sales revenue that is the break-even point for the operation. In mathematical terms, Breakeven is the point where: Total Expenses = Net Sales Revenue. Precisely the amount of sales revenue should be readily available on your income…